The Rosy Scenario
In this best-case scenario, the company is able to restore the gross margin
to the historical high of 45% after Q4 of `97 while keeping the expenses well
under control, with R&D and SGA running at 18% and 12% respectively.
In addition, the sequential revenue growth rate roses to 10%, or about 40% annually.
Here are the resulting quarterly revenues and earning under this best-case scenario:
(note: CRUS's fiscal '98 starts at March 97)
Rev($M) EPS
97Q4 279 .18
97Annual 983 .12
98Q1 307 .50
98Q2 337 .55
98Q3 371 .60
98Q4 408 .65
98Annual 1422 2.31
Are these achievable? Not likely for the next quarter or two for Cirrus,
although companies like ADI and ATML have consistently been able to run
an even better business model than this year after year. A few quarters' back, CRUS's
team were running a lousy business by allowing R&D budget unchecked while
watching their gross margin plummeting. Things have been getting better
after Thomas Kelly was brought in as the CFO. I'd like to see him taking
some more strong actions and eventually cutting the R&D budget to under 20%.
But this won't happen overnight. A more realistic model is to allow the
R&D declining steadily. This is what I'll do for the next model.
A more Realistic Scenario
In this scenario, R&D is declining gradually from the current level of 24% to
18% by the end of 98Q4. In the meantime, SGA is controlled at 12% while
revenue is growing at 8% sequentially. Gross margin is at 40% from the current
level of 38%. This will bring the net profit margin to about 7.2%. Results follow.
Rev($M) EPS
97Q4 274 .18
97Annual 978 .12
98Q1 295 .26
98Q2 319 .28
98Q3 345 .37
98Q4 372 .40
98Annual 1331 1.31
Alternatively, when I ran the model at 20% R&D, 12% SGA, and 42% gross margin
with revenue growing at the same rate, I got $1.47 for '98EPS.
The bearish scenario
In this scenario, gross margin is at 38%, while R&D stays at 25% and
SGA rises to 15%. This will result in a negative cash flow. For this
particular case, for every $1 the company sells, it spends $1.02. You
won't expect the company to make any money with such a business model.
Will this happen? I don't know. But by reading the last two quarterly
earning reports, it appears to me that Tom Kelly is well aware of the
risk and appears to have taken measures to get rid of those money-losing
businesses while keeping R&D under control. Nvertheless, I'll give you
the results just for reference (assuming a revenue growth rate of -2%
sequentially).
Rev($M) EPS
97Q4 248 -.07
97Annual 953 -.13
98Q1 243 -.07
98Q2 238 -.07
98Q3 234 -.07
98Q4 229 -.07
98Annual 944 -.28
To show you how importance it is for a company like CRUS with thin profit
margin to keep expenses under control, I made two runs with the first
one having an R&D at 22% and the second at 20% while keeping other parameters
the same with revenue growth rate at 8%, gross margin at 40%, and SGA at 12%.
The results are:
R&D at 22% at 20%
'98EPS .88 1.18
In comparison, an increase in rev growth rate from 8% to 10% does little
in improving the EPS (1.18 vs. 1.23) for a low net profit margin company
such as CRUS.
Although I've run other tests, I won't list the results here because I am tired
of typing :-). My conclusions from these analysis are that CRUS has a good
chance of returning to the glorious days if the management can keep the cost
under control while bringing the gross margin to above 40%. I'll watch their
next quarterly report closely to see if they'll make progresses in this direction.
Bluesky Qin |
